THONG GUAN - 十年风霜寒彻骨, 壮士雄心拼业绩 (2)

I gave this 2nd Thong Guan article a title: 十年风霜寒彻骨,壮士雄心拼业绩

Doing business can never be an easy path, yet, Thong Guan has been in the market for the past 73 years.

I try to tabulate the financial data for past 5 years:

Tables above shows the extract from Thong Guan income statement, and also the growth rate of both revenue and net profit. What we can see is that the revenue is growing at double digit rate, but the net profit growth is rather lagging.

I  try to ralate the above performance to below Gross Profit Margin trend.

Thong Guan (5 years)	2010	2011	2012	2013	2014
Gross Profit Margin (%)	11.60%	12.20%	10.97%	8.10%	12.90%

Plastic manufacturing industry rely heavily on the raw material cost, which ate up a big chunk of the revenue. From above COGS data, it is easily at the region of 88% - 90%. 

Generally, the raw material (resin) cost is closely link to the crude oil price. Thong Guan's  gross profit margin was at only 8.1% in year 2013 eventhough revenue stood at RM 720 million.

Based on 7 year oil price chart below, we can see a period starting end 2010 to mid 2014 where the crude oil stood at seriously high price (above USD 100 per barrel)

And if my understanding is correct, Manufacturing sector usually will predict the production volume and pre-order the raw material  several months in advance via planning department.

I believe Thong Guan enjoyed low raw material cost which  they have purchased at pre- oil price rally. Therefore, they still enjoy a good margin in year 2010 and 2011. There after, the result deteriorate in 2012 and significantly in 2013.

The oil price rallied has reached an end in mid of 2014. And we see start to see a upside trend on the gross profit margin as well.

[For year 2014, BursaDummy and Icon8888 has already indicated an one off item (impairement losses on the receiveable). Eventhough the amount is adjusted back, the EPS is still stagnant. ]

Below the Balance Sheet from 2010 to 2014:

Hence, I treat above balance sheet as healthy.

Let us examine now the past 9 quarters financial data (FY 2014 Q1 - Q4' FY2015 Q1 - Q3:

1. The profit for FY15-Q2 & Q3 has jumped up impressively (71.8% & 56.62%) against immediate preceeding quarter of same financial year. The profit is also better in these 2 quarters  eventhough lower revenue was recorded in Q2&Q3 FY 15 compared to Q2 & Q3 FY14.

2. Overall, the revenue has improved since 2014-Q4 to 2015-Q3.

The weakening ringgit has been named the reason for the HIGHER REVENUE.  For this case, i tend to agree that weak ringgit has resulted in more order and higher revenue in ringgit denomination. The reason is that the capacity expansion is still on going as per highlighted by BursaDummy in his research.  

The chart below pointed out the movement of Riggit Vs USD from January 2014 to December 2015. Noted that  Ringgit was EXTREMELY WEAK in month of September 2015 onwards, which is right at Q4, 2015.  

Therefore, are we expecting an even greater revenue? (with newly added capacity and weakest Ringgit) 

Personally, i think as long as the Ringgit against USD stays at 4.00 to 4.30 region and oil stays between USD 30 to USD 40 per barrel, REVENUE and profit of all plastic manufacturers will continue to stay impressive and 2016 should be the plastic industry investment theme play. The world is now driven by consumer spending. The future should be very bright.

To examine the impact of oil price to gross profit margin to the 9 quarters result, we look at the 5 years Brent Chart below.

	2014Q1	2014Q2	2014Q3	2014Q4	2015Q1	2015Q2	2015Q3
Gross Profit Margin (%)	11.97%	10.70%	8.63%	10.43%	12.17%	12.00%	17.33%

By relating the above chart and gross profit margin change, we see good improvement on gross profit margin  from Q4-2014 onward.

Although the oil price has started falling since mid 2014, the better margin only been seen in 2014-Q4

As highlighted earlier, manufacturing sector practice first-in-first-out basis on their raw material,  they have to finish consumed the old stock which they have purchase at much higher price (pre-oil price fall). 

Gross Profit Margin, as high as 17.33% was recorded on 2015-Q3 when oil price was in the region of USD 50 per barrel.

A closer observation:  the oil has further dip during last 12 months and is now in the region of 37 dollar. 

Therefore, are we expecting an even greater  profit margin for months to come?

3 key driver to Thong Guan's explosive earning ahead:

1) Weak Ringgit 

2) New Added Capacity

3) Very Low Oil Price

I am pretty sure all plastic manufacturers has been buying "cheaper and cheaper" raw material for the past 2 years. And the effect of the cheapness  will usually felt only after 1 or 2 quarters. Let wait and see.

I try to tabulate the revenue and operating profit among the Plastic Film & Packaging Players:

By using Revenue of period 7 (being the latest Q data), I ranked the biggest player Scientex, followed by Thong Guan, Daiboci, BPPlas SLP and SCGM.

But by using operating profit, Scientex 1st, Thong Guan 2nd, SLP ranked 3rd, BPPlas 4th and Daiboci 5th, last remained as SCGM. Again, this is just a very simple arrangement, if you run statistic, the different on operating profit may not be significant.

What interest me is to find out the growth of these companies, both REVENUE + PROFIT GROWTH. 

I again tried to tabulate below growth. The growth is calculate against immediate preceeding quarter, not by previous year corresponding quarter. Reason is i want to see which company is in growing mode. 

The above schedule shows that, i will only buying into Scientex and Thong Guan as my first choice as both has Revenue & Operating Profit Growth. I believe this is due to low oil price, weak ringgit and more importantly, CAPACITY EXPANSION to cater more orders.

I will not buying into BPPlas and SLP, as they are looking as beneficially of low oil price only. The revenue growth seem rather stagnant in last 3 quarters. SLP has be going through some capacity expansion. But the revenue doesnt seem picking up. Maybe we will soon see higher revenue. But for time being at high PE, i will skip SLP.

I will avoid Daiboci & SCGM for time being. SCGM has recently raise money to expand, i may look into this company again in future. I used to treat SCGM as the one with higher profit margin. But the profit doesnt seem growing.

Again, all above companies are in good profitability still.  They are Good and Profitable companies. They are just in different stages of business life.

Below i have copied and pasted, bulat bulat, what BursaDummy has written aboout capacity expansion in Thong Guan. 

----------------------------------------------------------------------------------------------------------------------------------

In year 2014, TGuan tabled a 3-year RM100mil expansion plan until 2016.

This aggressive capex aims to expand its plastic manufacturing division especially its stretch film and PVC food wrap .

CIMB Research expects TGuan's production capacity to increase by 40% from 120,000MT in early 2014 to 170,000MT per annum in 2016.

The initial plan laid out includes:

• Install thin stretch film machines with in-line pre-stretching capability & edge-folding
• Increase PVC food wrap production lines from 4 to 10 lines
• Install 33-layer nano-tech stretch film line
• Install its first blown film line
• Setting up an R&D center

Before this capex plan in early 2014, TGuan already has:

• 11 stretch film lines (9 in Malaysia, 2 in China) with annual capacity of 80,000 MT
• Garbage bags lines with annual capacity of 40,000 MT
• 4 PVC food wrap lines with annual capacity 6,000 MT

From TGuan's 2014 annual report, it is mentioned that TGuan has successfully installed the thin stretch film line in 2014.

At the same time, two additional PVC food wrap lines (5th & 6th) have also been added to increase its production capacity to 720 MT/month, or 8,640 MT/annum.

From its latest FY15Q2 quarterly report released in Aug15, it seems like the nano-tech stretch film line, blown film line and R&D center are still not in place.

Anyway, it has acquired organic noodles manufacturing facilities recently for its F&B division.

In 2016, it will continue to increase its PVC food wrap lines to 10 line with total production capacity of 15,000 MT annually.

Besides, I believe that it will also increase the production capacity of its thin stretch film gradually.

So, we know that PVC food wrap production will get an 150% rise in production capacity. How much net profit can it contribute to TGuan in the future?

This PVC food wrap business is a JV with a Korean company Power Wrap Inc since 2011. TGuan has 85% shares in it.

In FY14, TGuan's PVC food wrap division (TGPW) contributed RM32.8mil revenue and RM3.25mil profit to TGuan. 

Since the additional 5th & 6th lines were ready only at the end of year 2014, the figures above should be derived from 4 production lines.

This means that 150% increase in capacity can potentially raise the profit contribution from TGPW to RM8mil (should be operating profit).

As TGuan owns 85% of TGPW, it will work out to be around RM7mil.

Meanwhile, its stretch film capacity might also get some significant increase in capacity, especially the thin & nano-tech film which fetch higher margin.

----------------------------------------------------------------------------------------------------------------------------------

ABOUT THE ICULS:

Personally, i don't really worry about the ICULS since it is only convertible after 2016 Oct. And, I don't think the owner will going to convert them right after Oct 2016. The deadline is till 2019 with 5% coupon rate per annum. The biggest holders of the ICULS is still at the Ang's family. I don't see the point need to convert it in hurry especially when the company is still in expanding stage. Furthermore, the dividend yield is negligible at the moment.

They would rather wait till the share become more valuable before decide to convert them.  

Therefore, dilution is not really a concern to me yet.

Conclusion:

Investment carry Risk. After all, nothing is RISK-FREE in this world. 

We all know that using annualised EPS to predict share price carry very significant risk. Recent case of Johotin is one very good example. It is the exact scenario of Thong Guan like johotin, where they also going on capacity expansion, export business is so in focus, raw material is so low in price, ringgit is so weak, etc etc.

So, are we this time going to get suffocated by plastic film?

Can the:

(1) especially Weak Ringgit 

(2) especially low oil price 

(3) near completion of capacity expansion

save us from suffocation by the plastic film for Q4 and beyond?

Let Wait and See!

Cheers, YiStock

Additional Note:

All my articles are for reading pleasure only and should not be treated as buy/ sell call on any particular company mentioned in the articles.

I can never be 100% sure on the data i sourced and correctly predict the performance of the company I invest in. My investment strategy is very simple, If the business fundamental has not change, i will buy in whatever amount i can when there is a price correction. On the other hand, once i start noticing sign of deterioration, i will immediately cut the profit / losses. I only take care of downside, the upside will take care of itself

If i missed any investment opportunity, i will acknowledge i missed it. If i make a mistake on judging the source of info or material i read on certain company i invest in, i will only blame myself and vow to do better in future. 

My strategy is FA come first, and forever FA.